December 2010 Economic Outlook Has Sliver of Optimism

The December 2010 Econintersect forecast is for flat or slightly negative growth.

Econintersect Economic Index (EEI) slid into negative territory this month with a current reading of -0.08.  This is considered a relatively minor incursion into negative territory as the background fundamentals have changed since last month’s forecast:

1) The rate of decline of the index has slowed from 0.34 in August, to 0.22 in September, and now 0.15 in October; and,

2) The transport portion of the EEI has upticked.

Econintersect previously declared a recession watch on 28 September 2010.  This recession watch remains in effect as the overall economic pulse point data continues to degrade, and the EEI has now entered negative territory.  Putting this into an overall economic perspective – one month of negative forecast data would not be grounds for calling a recession.

However, there are growing indications that positive economic growth can occur in the months to come.  Econintersect tempers this optimism due to the general economic weakness and the relative weakness of the positive growth potential.  A major economic shock (a black swan event) could easily derail a slow growing economy, as well as a slow blood sucking mortgage crisis.

Transports are Strengthening

A major component of the EEI is transport related.  Econintersect considers transport (truck, rail and sea container) counts a primary economic pulse point – and its trend represents underlying economic pressure.

This month, the negative trend in the transport portion of the EEI index upticked for the first time in five months.  Although one month is not a trend, it broke the free fall of the transport portion of the EEI.  This portion of the index is quite noisy as it quantifies the month-over-month (MoM)  change (positive numbers represent seasonally adjusted MoM growth, negative numbers represent seasonally adjusted MoM contraction).

To EconIntersect, transports represent the real economy – the economy of Joe Sixpack, the economy of Main Street.  All of our man made surroundings, the clothes we wear and the food we eat are moved several times by transport during their processing / delivery cycles.  A growing economy consumes more, a contracting economy consumes less.

  • Sea Container Counts (analysis here) overall increased in October even though there were some weakness in imports which is indicative of a poor Christmas consumer product outlook.
  • Truck tonnage counts have been increasing for the last three months.  A quote from the November 2010 ATA press release:  “October tonnage levels were at the highest level in three months, even after accounting for typical seasonal shipping patterns. These gains fit with reports out of both the manufacturing and retail sectors and show there is a little bit of life in this economic recovery. ” However, truck tonnage does remain inside of a negative channel.
  • Rail Car countsare up a solid 6%+ YoY, and the trend lines continue to show positive growth (see analysis here).
  • Diesel Usageis the only transport indicator with a negative MoM growth (see analysis here).   Diesel is used primarily in truck and rail transport, but the data source used isolates the usage to truck transport.  Econintersect suspects that more truck tonnage is being carried on rail (intermodal) – as intermodal rail counts are nearing pre-recession levels.  This would reduce the fuel consumption for trucking, and not make fuel use inconsistent with growing truck tonnage counts.

Labor Markets Slow Growth Is Still Growth

Although Econintersect has methodology concerns with Bureau of Labor Statistics, there remains overwhelming evidence that 2010 has brought jobs growth – although it remains lower then the population growth rate.  Currently, the initial unemployment claims are at levels where historically real jobs growth occurs.

Recessions historically do not occur while the job market is growing.

Econintersect does not use employment or unemployment in its economic indicator.  If the level of employment in America falls, this will be clear evidence the economy is contracting.  After the severe employment contraction of the Great Recession, business is currently lean-and-mean.  If employment falls further, it is due to the economy contracting.

So conversely, seeing private sector jobs growth over 100,000 per month would be clear evidence of expansion.  Any lower growth will leave the economy in economic doldrums – the dreaded Japanese L (or non-recovery) – as the economy is growing slower than the population growth of the labor pool.

EEI Explained

Econintersect’s forward looking economic indicator uses non-monetary economic pulse points that have a general – not specific correlation with Gross Domestic Product (GDP). These pulse points are geared to anticipate consumer and industrial income / spending for 30 to 60 days after the indicator is issued.

Econintersect uses relative scales in evaluating the economy – zero means tomorrow will be the same as today.  The EEI is built on a two part index – and both parts must be negative for several months before Econintersect considers a recession is likely underway.

Our methodology has been borrowed from the alert system used by the U.S. Weather Bureau:

Watch:  A recession is possible.

Warning:  A recession is probable.

Recession:  A recession has started.

Past EEI Forecasts for: November 2010October 2010September 2010.